What is the smallest expected loss with a probability of 2.5 percent over the next two months for a portfolio with an annual expected return of 13 percent and a standard deviation of 28 percent?
A) -24.07%
B) -20.24%
C) -28.91%
D) -26.32%
E) -22.86%

Question

Quizplus · Accepted Answer

The smallest expected loss at a 2.5% probability is calculated using the Value at Risk (VaR) formula. For a normal distribution, VaR can be calculated as: VaR = Z * σ * √(t/12) - μ * (t/12), where Z is the Z-score for 2.5% (approximately -1.96), σ is the annual standard deviation, μ is the annual expected return, and t is the time period in months. Plugging in the values, we get: VaR = -1.96 * 0.28 * √(2/12) - 0.13 * (2/12) = -20.24%.

What Is the Smallest Expected Loss with a Probability of 2.5